Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Mark Sutherland - Vice President, Investor Relations

Fred Festa - Chairman and CEO

Hudson La Force - Senior Vice President and CFO

Analysts

Rob Walker - Jefferies

Mike Ritzenthaler - Piper Jaffray

Mike Sison - KeyBanc

Jim Barrett - C.L. King & Associates

Patrick Duff - Gilder

Chris Shaw - Monness, Crespi

W.R. Grace & Co. (GRA) Q3 2012 Results Earnings Call October 24, 2012 11:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2012 W.R. Grace & Company Earnings Call. My name is Carisa and I’ll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now turn the conference over to Mr. Mark Sutherland, Vice President of Investor Relations. Please proceed, sir.

Mark Sutherland

Thank you, Carisa and hello, everyone, and thank you for joining us today, October 24, 2012 for a discussion of Grace’s third quarter 2012 results released this morning.

Joining me on today’s call are Fred Festa, Grace’s Chairman and Chief Executive Officer, and Hudson La Force, our Senior Vice President and Chief Financial Officer. Our earnings release and the corresponding presentation are available on our website. To download copies, go to grace.com and click on Investor Information. The links are available in the upper right corner of the page.

As you know, some of our comments today will be forward-looking and are made under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected or implied due to a variety of factors. Please see our recent SEC filings for more details on the risks that could impact Grace’s future operating results and financial conditions.

We will also discuss certain non-GAAP financial measures which are described in more detail in this morning’s release and on our website. Reconciliations to the most directly comparable GAAP financial results and other associated disclosures are contained in our earnings release and on our website.

Our comments on forward-looking statements and non-GAAP financial measures apply both to the prepared remarks and to the question and answer. We want to remind everyone that this webcast contains time-sensitive information that is accurate only as of today. Any redistribution, retransmission or reproduction of this call without company consent is prohibited.

With that, I’ll turn the call over to Fred.

Fred Festa

Thanks Mark. Good morning, everyone and thank you for joining us. Our businesses delivered solid performance this quarter. Let me share with you what I liked about our results.

First, all three business segments delivered higher sales volumes and improved base pricing. On a consolidated basis, we achieved organic growth of 5% in the quarter. For the year-to-date, organic growth is 7% in line with our historical growth rates.

Second, I continue to be very pleased with our performance in the emerging regions, where sales increased 17% in the quarter. With weak economic conditions in the advanced economies, our strong performance in the emerging regions validated our continuing investments there.

Third, our margin performance continues to be strong. Gross margin in quarter three and year-to-date was 36.7% at the high end of our targeted range of 35% to 37%. We took cost reduction actions early in the year to ensure we properly positioned for the 2012 macroeconomic environment.

Adjusted EBITDA margin increased 40 basis points year-over-year to 20.4% in the quarter. On a year-to-date basis, adjusted EBITDA increased 80 basis points to 20.1% We have achieved our 20% adjusted EBITDA goal one year ahead of schedule.

When we developed our 2012 operating plan last year, we knew that quarter three was going to be our most difficult quarter of the year. We knew we’d have a tough comp against the strong 2011 third quarter due to lower rare earth surcharges and the flow through of rare earth inventory costs.

We communicated these issues to you early and we worked hard to ensure that our performance was as strong as possible. As you know, we have set three long-term performance goals. Adjusted EBITDA of $850 million by 2014, sales of $4 billion by 2014 and cumulative three year adjusted free cash flow of more than $1.2 billion.

We are well-positioned to achieve these goals. What I also like is the potential of our targeted growth programs to lead the further growth opportunities down the road. Our business leaders recognize this and are ready to deliver.

As you know, we are investing in FCC catalysts in the emerging regions, including our Abu Dhabi joint venture and our catalyst acquisition in China, leveraging our polyolefin technology and investments globally, improving our product performance and competitive position in materials technology, and capturing construction products growth in North America, emerging regions and commercializing new technology in construction chemicals.

Over the next 60 to 90 days, we will complete our 2013 operating plan. There is significant uncertainty in the global operating environment. Developing our plan, we will continue to focus on those things that are within our control and mitigate the risk of those things that are not. We’ll share our 2013 outlook and assumptions with you in early February.

Before I conclude my remarks, I'd like to bring you up-to-date regarding the most recent developments in our bankruptcy. The settlement with the Libby related claimant has been put in the fact, resulting in the withdrawal of three appeals to our plan of reorganization. There are now five appeals pending before the Third Circuit.

We are in the middle of the briefing schedule, which will be completed by year-end. We expect the court to hear oral arguments in quarter one. Following that, we'll wait the court's ruling, which we continue to believe will be in our favor on all the appeals.

Given this process, we view the fourth quarter of 2013 as the most realistic timing for mergers. As I stated in the past, operating Chapter 11 is not a hindrance for our strategic plan or how we run the business. The only real impact has been on our ability -- has been on our ability to return cash for our shareholders. We continue to keep you -- we’ll continue give you up-to-date as events unfold over the coming year.

I'll now turn it over to Hudson to provide more specifics on the quarter.

Hudson La Force

Thank you, Fred. Please turn to pages four and five and we’ll start with a quick review of Grace's overall results for the quarter. Page four shows the four key measures we use to evaluate our performance and page five shows additional year-over-year and sequential comparisons.

Sales in the quarter were $777 million, down 10% from last year. Organic growth of more than 5% was offset by lower rare earth surcharges of about 9% and unfavorable currency translation of 6%. Year-to-date organic growth is totaled 7%.

Adjusted EBIT was $129 million, down 9% from last year. Adjusted EBIT margin increased 20 basis points to 16.6% and adjusted EBITDA margin increased 40 basis points to 20.4%. Good productivity and good operating expense control drove the growth and margins.

Adjusted free cash flow was $286 million for the year-to-date, compared with $155 million last year. The growth in cash flow was due to improved working capital performance.

Adjusted EBIT ROIC was 35% on a trailing four quarter basis compared with 33% in the prior-year quarter. Adjusted EPS was $1.04 per diluted share.

Let's turn to catalyst technologies on page six. Third quarter sales for catalyst technologies were $299 million, down 19% from the prior year quarter. Base pricing and sales volumes increased 8% but were more than offset by lower rare earth surcharges and unfavorable currency translation totaling $100 million or 27% of sales.

FCC catalyst base prices and sales volumes grew 13% in the quarter, led by strong sales in the emerging regions. Sequentially, FCC catalyst sales volumes increased 1% from Q2 to Q3 and 7% from Q1 to Q2. We’re very pleased with the progress we have made replacing sales lost due to the previously announced refinery closures. These closures accounted for $22 million or 7% of sales in the 2011 third quarter.

Polypropylene catalysts continue to grow double digits. Sales of polyethylene catalysts decreased in the quarter, however. Several large customers reduce their polyethylene catalysts inventories, summed by as much as one to two months in response to weaker demand in Europe and slower growth in Asia.

Catalyst technologies gross margin was 40.5% for the quarter and 41% for the year-to-date. Segment operating margin was 30.8%, an increase of 40 basis points year on year and 30 basis points sequentially. The cost of the Q2 turnarounds are behind us and margins have improved.

Our share of ART’s net income was $5 million, down $1 million from last year, reflecting the lumpy order patterns typical of this business. For the first nine months, ART’s net income was up 5%.

We expect ART to have a good fourth quarter with earnings up double digits for the full-year. We expect continued growth in catalyst sales volumes in Q4 and continued improvements in base pricing but this organic growth will be more than offset by approximately $90 million of lower rare earth surcharges, unfavorable currency translation in the impact of the previously announced refinery closures.

We have begun engineering work on the Abu Dhabi regional FCC catalysts plant and continue to expect the plant to startup in 2015. We recently received the required Chinese government approvals for the Noblestar Catalysts acquisition and we expect to close in Q4.

Let’s turn to page seven for Materials Technologies. Third quarter sales for Materials Technologies were $214 million, a decrease of 3% compared with the prior-year quarter. Organic growth totaled 5% was more than offset by $18 million of unfavorable currency translation.

Emerging region sales volumes increased approximately 10%, led by strong demand for engineered materials and packaging products. Sales in the advanced economies grew weaker, however, especially in Europe where demand slowed notably at the end of the quarter.

We are more cautious about demand in Europe than we were 90 days ago. Gross margin was 32.8% compared with 33.3% in the prior-year quarter and 33.5% in 2012 second quarter, the decrease in gross margin primarily reflects $2 million in costs related to the Q2 plant turnarounds.

We expect gross margins to return to prior quarter levels in Q4. Although earnings in this segment were weaker than we wanted, we remain pleased with our progress in this business. Organic growth is up, underlying gross margins are up and our business leadership team is laying strong foundations for solid performance. We are on the right path to deliver improved gross margins and operating margins through 2014.

Please turn to page eight for construction products. Third quarter sales for construction products were $263 million, a decrease of 4% compared with last year. Pricing improved 1% and sales volumes grew 1%.

Sales in North America were impacted by reduced demand for our residential reroofing products due to last year's mild winter and the early start to this year's reroofing season. Sales of specialty construction chemicals increased approximately 4% after growing 14% in the prior-year quarter.

Sales in Western Europe were impacted by unfavorable currency translation, continued market deterioration and our decision to exit low-margin businesses in the region. We remain cautious of our construction activity in Western Europe.

Emerging regions sales growth was strong and we continue to be excited about our opportunities there. Sales in the emerging regions grew 13% in the quarter and are now 35% of segment sales. Latin America, the Middle East and emerging Asia, all posted double-digit sales growth year-over-year.

We completed the Rheoset acquisition in the quarter and are very pleased with the early results there. The acquisition was accretive to operating income in the quarter, the integration is on schedule and we are confident in achieving our targeted synergies.

Segment gross margin improved 90 basis points to 35.4% and segment operating margin improved to 180 basis points to 13.9%. Segment operating income grew 22% to $37 million. This segment's best quarter for operating income since the 2008 third quarter.

Construction products delivered very good earnings growth this quarter, driven by good operating leverage in North America and in the emerging regions, and improved profitability in Europe.

Let’s turn to our outlook on page nine. Consistent with our comments last quarter, we are narrowing our 2012 adjusted EBIT outlook to $510 million to $520 million, an increase of 6% to 9% over 2011. We expect adjusted EBITDA to be in the range of $630 million to $640 million.

Our business fundamentals are solid but the economic environment continues to be challenging. Polyethylene markets have softened. Europe is weaker than we expected 90 days ago and the pace of U.S. commercial construction activity remains uncertain.

There are some of the updated assumptions for our outlook. We expect full-year sales of approximately $3.15 billion. In Q4, we project the total impact of lower rare earth surcharges, the stronger dollar and previously announced refinery closures to be about $110 million compared with Q4 last year.

We expect our gross margins to continue to be at the higher end of our 35% to 37% target range, and we expect our expense productivity initiatives to continue. We expect an average euro exchange rate of $1.28 per euro for the fourth quarter, compared with an average of $1.34 per euro for Q4 2011. We expect the full-year effective tax rate of 33.0%, and we project about 77 million diluted shares outstanding.

Two final notes before we open the call for your questions. Corporate costs declined 16% year-on-year. We started 2012 with a strong emphasis on cost and that approach has paid off, as economic uncertainty is increased during the year.

On taxes, we are pursuing a purposeful strategy of maximizing the present value of all of our tax attributes, including current year attributes and the NOL, we generate at emergence.

With the delay in our bankruptcy, we have the opportunity to reassess our tax strategies for 2012 and 2013. To maximize the value of our current tax attributes, we may elect to pay between $30 million and $50 million in U.S. federal income taxes this year. If we do, our cash tax rate would increase from 13.5% year-to-date to about 23% for the full year. We are still evaluating our opportunities and these amounts may change.

With that, we’ll open the call for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question will come from the line of Laurence Alexander of Jefferies. Please proceed.

Rob Walker - Jefferies

Good morning. This is Rob Walker on for Laurence.

Fred Festa

Hello, Rob.

Rob Walker - Jefferies

Hi. I guess the first, can you guys help quantify the various year-over-year headwinds to catalyst EBIT in the quarter? You’ve done a good job qualitatively. And then I guess just or if it’s easier, once these headwinds pass, what do you believe is the normalized profit run rate in the segment?

Hudson La Force

Rob, you want to talk about this surcharge sales execution?

Rob Walker - Jefferies

Just like kind of, profits this quarter were down about $20 million year-over-year, if you can help bridge kind of that $20 million versus inventory cost affect around?

Hudson La Force

All right. Okay. On the sales line, hopefully we are clear there. It’s a $100 million dollars, lower rare earth surcharges and the unfavorable currency. What is flowing through on the earnings line are these capitalized rare inventory costs that are finally flushing through.

I think as we’ve discussed earlier, is we were buying rare earth last year, we were buying it at higher values than current costs and we were buying more rare earth. We are a FIFO accounting company and so as rare earth costs have come down, and our quantity of rare earth owned has come down than that is flowed through those capitalized costs,

Rob Walker - Jefferies

Sure. Can you help quantify what that impact was versus the $20 million delta year-over-year?

Hudson La Force

It is the lion hare of the delta, Rob.

Rob Walker - Jefferies

Okay. So maybe for normalized profit we could add that in, that add you think that that would be more normalized.

Hudson La Force

On a normalized profit, our gross margins have run 41% year-to-date. That's what we expect them to be for the full-year and our EBITDA -- excuse me, our EBIT margins, I think are 31% there about year-to-date and you can assume that that’s a normalized level.

Rob Walker - Jefferies

Great. Thanks. And then just, it’s a follow-up on GCP. So a very good quarter, I guess how much of the profit improvement was due to the actions you’ve taken in Europe to exit some of the lower margin businesses, and I guess where do you’ve seen margins going near-term? And then kind of on a longer-term basis, workaday be peaking relative to the prior peak.

Fred Festa

Yeah. Rob, this is Fed. I really like what we’ve done in construction products and how we positioned it and the actions that team have taken. I mean, even on reduced volumes in Europe, our profitability was up modestly from this year to last year. At an operating margin of 14%, we set with a full recovery, that been about it. That was about the average 14%, 15% in the past.

We suffered the full recovery. There was no reason that this segment could not be in the 18%, as highest 20% operating margin perspective. So where we sit today, as I mean we like what we've done in the emerging regions. They’ve grown very nicely for us.

In North America, the residential recovery is just starting. We generally will tail that with our chemicals tail that by at least six months because the building that a company is that, we will really be in the residential side.

In the commercial construction activity in North America, that did that take a little bit of a pause. And we are not sure if it's, just because of some of the uncertainty out there around financing or whatever, but it has taken some variable pause. So there's no reason to think that that will not come back either.

So again, just to recap, I like what we are doing, the growth in the emerging. I like the leveraging up the volumes, especially in both Europe as well as North America. And I like the costs that we’ve taking out that allow us to have this 3 to 500 higher basis points of margin going forward.

Rob Walker - Jefferies

Great. Thanks. I will jump back in queue.

Operator

And your next question will come from the line of Mike Ritzenthaler of Piper Jaffray. Please proceed.

Mike Ritzenthaler - Piper Jaffray

Good morning. Breaking down the revenues geographically, the nearly 40% of sales in emerging regions is encouraging for the total company sales and I was wondering if you could provide a little context around emerging region growth in catalysts with X surcharges? Since volumes were resilient, pricing was strong and perhaps touch on how those regions are shaping up versus your strategy for capacity expansion, since you’ve mentioned Abu Dhabi and China?

Fred Festa

Yeah. Mike, this is Fed. I mean, we feel very good about the positioning. Listen, when we lost the refineries with the closure of the shutdowns earlier in the year, we didn’t feel good about that. But in the end what is playing out is, the refineries in the advanced economies, Europe and North America are running at higher rig utilization rates. That means, ultimately, they are going to see more catalysts as they run at higher rates.

In addition, we’ve been able to get our growth on the FCC catalysts as well as the hydro processing side and the emerging regions, both the Middle East as well as Asia. But that has been very supportive of the strategy that we have. And as you know, we expect to continue to grow in China, as well as the Middle East with those, the investments we are making.

Mike Ritzenthaler - Piper Jaffray

Yeah. That makes sense. It looked like free cash this quarter and the looking at a trailing nine months was particularly good and my question is around, how much further the improvements and efficiencies in working capital can be pressed in general before the supply chains start to see the some stress?

Fred Festa

Well, I mean, if you look, we think we're at 63 days of that working capital at the end of another third quarter, that’s not world class yet. And if you look at that compared to what we've done on some others, we think that that we can break the 50 day barrier and we’ll reevaluate it. So given our manufacturing assets positioned around the globe, helps us dramatically.

Having FCC plants in North America as well as Europe, having assets in the silica side around the world, as well as the construction dramatically helps. So, we will continue to push on that and there's no reason that we will not get that working capital down below 50 days and we’ll see where it goes from there. So, I feel good about it.

Mike Ritzenthaler - Piper Jaffray

Other levers, this is a follow-up to that. Other levers that can or need to be pulled on the corporate level to hit that $1 dollar or $1 billion plus free cash target.

Fred Festa

No. It's really about the profitability, rolling to the $4 billion of sales, having the gross profit margin in the 35% to 37% range and managing our working capital effectively.

Mike Ritzenthaler - Piper Jaffray

Okay. Great. And then just one last one for me. On the cost reduction initiatives that you started earlier this year, have they largely played out or are we still on the seven, three thinning and other new initiatives that you can envision to drive further efficiencies?

Hudson La Force

Mike, this is Hudson. The actions that we took were announced at the beginning of this year, are largely in Q3 P&L. We executed quickly on that amount, but we're continuing to look at new opportunities. There was a restructuring charge in Q3. It wasn't much I don't actually have the number, $1 million to $2 million I think.

Reflex continued repositioning of our manufacturing footprint, primarily in Europe this quarter. We did some things in Europe this quarter to continue to fine tune our manufacturing footprint in Europe, and we are looking at other opportunities to continue to take cost out where we can.

Mike Ritzenthaler - Piper Jaffray

All right. Perfect. Thanks, guys.

Operator

And your next question comes from the line of Mike Sison of KeyBanc. Please proceed.

Mike Sison - KeyBanc

Hey, guys. Nice quarter.

Fred Festa

Hi, Mike.

Mike Sison - KeyBanc

In terms of your outlook for 2012, it would imply that the fourth quarter is going to have pretty good earnings growth, I mean relative to most of the sector that are going to struggle to do that. Fed, can you just give us a feel for, maybe in each of the segments where you see the growth coming from?

Fred Festa

Yeah. Thanks, Mike. If you are thinking about the catalyst side, as Hudson said we will get growth in both the FCC as well as the hydro processing in the fourth quarter. Our polypropylene catalysts should continue to grow double digits into the fourth quarter. The polyethylene, which we talked about, was impacting the third quarter. We are cautious on that.

We know customers maintain about 3 to 6 months of our catalyst inventory, and we saw it in the Middle East, and Europe then take it down 1 to 2. So we are cautious not projecting that they will go back to that level that would be an upside if they do.

If you think about materials business, we are generally looking at relatively flat between the third and the fourth quarter maybe some growth in the emerging regions, maybe offset by some in Europe. And on the construction project -- construction, you get the seasonality affect because of weather in the Northern Hemisphere. But we are still projecting some good growth based on leveraging and the emerging regions merging region growth on both revenue and profitability.

Mike Sison - KeyBanc

Okay. Great. And then in terms of these rare earth costs, can you give us an update of whether at now and where you think they are going to go, if it’s certainly impossible.

Fred Festa

Mike, we traced probably, 90%, 95% of the run-up, they are almost to the level that they were a couple years ago. In terms of future direction, we don't know. We don't claim to have a crystal ball on this. For our business, the best is certainty, whether it's a low level or a high level, it’s better for us just to have a predictable, a level of rare earth that helps us serve our customers best. But we don't have a view up or down.

Mike Sison - KeyBanc

If the pricing stays stable through the end of the year, then the negative impacts would sort of end?

Fred Festa

From what’s in our actual P&L, yeah. But will have the year-over-year affects through the first half of next year. And the rare earth surcharge started to really come down, the first part of this year. Q3 was a big step down and Q4 will be a big step down. So you’ve got the year-over-year compare issue, but what is actually in our P&L will be very, very small by the end of this year.

Mike Sison - KeyBanc

Got it. And Fed, you’ve rolled out a lot of exciting new product in FCC catalysts using lower rare earth, are those technologies still accepted by customers, are they asking to go back, is the -- and I’m going to use, give an update on that?

Fred Festa

Yeah. No, we did as you said and we feel very good about it. As a matter of fact, we are continuing to reformulate a new, some new grades of FCC product that will have a balance of both in it. So you will see us continually do that and we will be rolling those out during the fourth quarter and the first quarter.

Mike Sison - KeyBanc

Okay. And last question, you’ve rolled out or you’ve not rolled out but you gave us a little more color on the 2014 goals. The 850 need acquisitions and such, but if you think about the organic upside potential to ’14, do you feel pretty good about being on that track and despite what we are seeing in the economy and such?

Fred Festa

Listen, it’s clear the economy has slowed somewhat in the third quarter, specifically Europe. But as we look to 2014, we still feel good about that outlook that we have and I feel good about the programs we have behind it. I feel good about the investment side.

Analyst

Great. Thank you.

Operator

And your next question comes from the line Jim Barrett of C.L. King & Associates. Please proceed.

Jim Barrett - C.L. King & Associates

Good morning, everyone.

Fred Festa

Hi, Jim.

Hudson La Force

Hi, Jim.

Jim Barrett - C.L. King & Associates

So, I had a question for you North American specialty construction chemicals, cement and concrete prices are starting to rise at least regionally. Has that historically provided your business with an umbrella to raise prices or do you need something more than that to justify a price increase to those industries?

Fred Festa

No. It’s a great question. And obviously, Jim, you have been around the block on this before. Generally when cement prices raised means two things, means that volume should be following.

Jim Barrett - C.L. King & Associates

Right.

Fred Festa

As well as for us historically, it's been able to enrich the pricing on the chemical side. So, we are obviously looking at that as those announcements take place.

Jim Barrett - C.L. King & Associates

I see. Okay. And then on a separate subject, the inventory destocking you are seeing in polyethylene catalyst, any sense as to how much more potential room, could there be for your customers to liquidate inventories. Is there a minimal number week supply that they need to operate their plants. If you just give us a general perspective on that?

Fred Festa

Well, I mean as I say, generally depending on the region that keep us up to six months, three to six months of inventory on the specialty catalyst.

Jim Barrett - C.L. King & Associates

Right.

Fred Festa

As a key component, we think selectively it was reduced one to two. I -- supply chain has been getting shorter, but I generally feel without another economic downturn its reached the levels of where it’s going to be. If there is a dramatic downturn that would affect these units to stop, obviously they would -- we look at it. But I think it’s attractive its been the leveled off.

Jim Barrett - C.L. King & Associates

Okay. Okay. Well, that’s very helpful. Thank you very much.

Operator

Your next question comes from the line of Patrick Duff of Gilder. Please proceed.

Patrick Duff - Gilder

Hi. Good morning, guys. Thanks very much. I had a couple of questions, I do not take up too much time. First, I mean I never would have thought, we’d be suffering bankruptcy now, but Fred, and I think you’ve given a very conservative outlook of how much longer this may take but the question is, if by some chance and I don’t know why, but if by some chance the emergence did not occur by Q4 next year.

Would that in any way impact of the 2014 objectives, where I’m going on that is you continue to have a suboptimum capital structure and the longer you're in bankruptcy, you talk about returning cash to shareholder or just making better use of the cash and your balance sheet is hindered by the bankruptcy. So, if for any reason, there is a delay could that potentially impacts to the 2014 goals?

Fred Festa

Pat, we believe the answer to that is no. And let me clarify. What we are unable to do is pay a dividend or buy a share back to return cash that way. But the cash to turn our balance sheet to be able to use strategically for investments, acquisitions that has not been impacted. And I don’t see that been impacted whether it's reemerged in the fourth quarter or the first quarter of 2014. We’ve proven and we worked through this process long enough, quite long enough that cash does not -- our capital structure does not hinder us from operating.

Patrick Duff - Gilder

Okay. Okay. Great. Thanks for that. And then I just wanted to turn attention to Europe, in a couple of the segment you called out, particular weakness in Europe, Hudson, you said your outlook there is deteriorated from just what it was 90 days ago. I mean if we looked at the overall decline in sales for the EMA segment. How much of that was -- is embedded, is the surcharge embedded in that particular geographic region as opposed to just general economic conditions. I think was it like if I remember, I guess, 17% decline in the EMA segment of the company. So how would you -- we broke that out between surcharges and then just normal business?

Fred Festa

There is a surcharge component of that, Pat. I don't have the specific number. But what you're also seeing is a stronger dollar, a big piece of that is the year-over-year change in the euro, dollar exchange rate.

Patrick Duff - Gilder

Okay.

Fred Festa

And we did exit some businesses in Europe that is affecting the year-over-year. This is decisions that we made in the construction business to we actually closed the plant, construction chemicals plant in Southern Europe. It’s in the year-over-year compare. And we walked away from some low margin business in Southern Europe that's in the year-over-year compare.

So, its more -- the effects are much bigger currency surcharge these pullbacks we’ve done in construction then it is a downturn in the economic environment in Europe. As you know, I think European, the various country-by-country but they're kind of at zero some countries are slightly negative, some are slightly positive that’s about our point worse than what we thought at the beginning of this year. So, the macro environment a softer that the bigger effects to these other items, we have been talking about.

Patrick Duff - Gilder

Okay. Okay. I mean, so I just -- what I’m thinking here is as you sit down to do that -- the budgets for next year, I don’t -- is that your -- you maybe a point behind what you thought things were going to be this year, but it seems that some sudden segments of the economy over there have had such a dramatic contraction over the last 90 days or so, that they may just start bottoming from the standpoint of -- they’ve just contracted so much. Not getting into the budget, but what are, kind of thinking about the European business looking into next year?

Fred Festa

Let me give you a little, Pat, some qualitative around that. We’d like the positioning of the refining catalysts business. I think the ultimately the shutdowns are going to help. We’ll help going into next year as refineries, higher utilization on the catalyst side. On the materials technology side across the Board -- to your earlier question, we think it's 1% to 2% in that range, where its gone.

So, if it bottoms and comes back, I mean that would be great. So, we like were -- we like how our position there. We like our position on the margin side that we're assuming and we're counting on improved margins in that business going forward.

In the construction chemicals or the construction business, I mean we've taken it down to a level where any bounce as you saw, we are down dramatically on volume there in the third quarter and still increased our profitability. So, any bounce at all will help us on that side.

So, for us Europe is a big piece of the equation, but you're going to remember a lot of the European production gets exported out of there as well. Exported to the Middle East, exported to Eastern Europe, so what actually gets consumed there is less than what you would see on a piece of paper.

Patrick Duff - Gilder

Okay. Great. That’s really helpful, Fred and I appreciate your thoughts and thanks again guys for all you’ve done for the shareholders.

Fred Festa

Thanks, Pat.

Operator

And your next question comes from the line of Chris Shaw of Monness, Crespi. Please proceed.

Chris Shaw - Monness, Crespi

Yeah. Good morning, guys. How you doing?

Fred Festa

Hi, Chris.

Chris Shaw - Monness, Crespi

Thank you. Fred, could you just drill down a little bit more into the SEC demand or volumes there, I mean there seem pretty good to the quarter and your competitor have pretty good volumes and I know you attribute some of it to, I guess, emerging markets. But it seems higher than I would think that overall fuel demand would be, so what’s happening there. Are there new plants that came on line, is it sort of loading or is it just -- is it really fuel demand that high in those regions?

Fred Festa

Well, it’s a combination -- it's a combination of the new plants that have come on line in China. We’re participating in that, Middle East as well as India coupled with in the advanced economy some utilization rates of these catalysts are up. These plants run higher and as we look at our customer’s margins -- the margin -- refinery margins are up the third quarter -- our customers margins were up. So they are running these units harder. And they are using them obviously more catalyst on a volume basis.

Chris Shaw - Monness, Crespi

Okay. Good. And then I guess this is for Hudson on the -- I don’t know the accounting went up but that the sort of voluntarily we paying some taxes in the U.S. what does that actually do, does that save you guys some money in the future, what clear what the -- what’s going on there?

Hudson La Force

Sure. This is -- has to do with the way the tax code treats the use of NOLs. And the tax codes gives a priority to NOLs over other tax attributes meaning you have to use the NOLs first. Other attributes that we have would have been pushed off into the future and could even have expired. And then some attributes just aren’t available, if you're using -- if you're in a NOL position.

We thought we would be in a NOL position this year, because of the timing of the emergence that’s obviously pushed off to next year and that frees up those tax attributes to be used this year. Another quirk of the code though is to be able to use these attributes you actually have to pay some amount of tax. And so what we're trying to do is figure out what’s the right amount of tax to pay this year to maximize the present value of the current tax attributes balanced against the present value of the NOL.

And our purpose today was to give you all heads up on this. It is a work in process, obviously, but we didn't want you all to be surprised, if we did decide to pay some taxes this year.

Chris Shaw - Monness, Crespi

Okay. So, good. Thanks.

Operator

(Operator Instructions) And your next question is a follow-up from the line of Laurence Alexander of Jefferies. Please proceed.

Rob Walker - Jefferies

Hi, guys. Rob Walker again. And most of my questions have been answered. Just one or two things to follow-up on I guess in SEC catalysts you lost about 7% of volume sequentially the $22 million. You still manage to grow 1% sequentially. So, core volumes are up roughly 8%. Is that distorted due to Q2 turnaround or is the point that higher utilization rates are making the delta or I guess it still you are shaping up for very good volume here in 2013?

Hudson La Force

I have just one point of clarification, Rob. The 7% headwind was a year-on-year headwind. And the sequential growth was 1%.

Rob Walker - Jefferies

Okay. So, but I mean the volume you will be lost was multi started in Q3, you have some loss in Q2 right? So most of that would have occurred in Q3? I guess...

Hudson La Force

Well, on -- yeah, most of it. But that -- but there was still a significant impact in Q2, because there were refinery closures in Q1, we had expected those and those were kind of in our expectations for the year. We talked about one refinery closure in Q2 that we did not expect that the beginning of year. But there was already a year-over-year headwind in Q2.

Rob Walker - Jefferies

Okay. Thanks. The core volumes are much less than that.

Hudson La Force

Yeah. But that the broader point from our perspective is we've made very good progress replacing the volume that we've lost because of these plant closures.

Rob Walker - Jefferies

Okay. Well, I guess in following-up on that point, because of that progress, would you assume that looking into Q1, which is normally a seasonally down quarter for you guys, as you're seeing new wins and maybe more emerging regions replace that developed regions could, is it possibly that you could see sort of abnormal seasonality and have that actually up sequentially?

Hudson La Force

It certainly possible, Rob, but we're not going to talk about 2013 yet.

Rob Walker - Jefferies

Okay. And then just the last thing was just -- so you talked a lot about polyethylene catalysts and volumes just on price has the volume weakness affected your ability to hold price there and was price up either sequentially or year-over-year this quarter? Thanks.

Hudson La Force

It does not affect our pricing and pricing is improving.

Rob Walker - Jefferies

Great. Thanks, guys.

Hudson La Force

Thanks, Rob.

Operator

And there are no further questions at this time. I’d like to turn the call over to Mark Sutherland for closing remarks.

Mark Sutherland

Thank you, Carisa. I want to thank everyone for joining us on today's call. I'm available for follow-up questions, please feel free to reach me at my direct line at 410-531-4590. Again, thank you for joining us today. Thanks.

Operator

Thank you very much. This concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: W.R. Grace's CEO Discusses Q3 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts